The pioneering enterprises described above were among the first of many entrepreneurial enterprises to build giant, global business empires. The operations of these integrated companies required the hiring of dozens and in time hundreds of lower and middle managers. The tasks of the managers on the lower level who had charge of the operating units did not differ greatly from those of men who owned and managed a single independent factory or commercial office. But the tasks of the middle managers were entirely new. Middle managers had to pioneer in the ways of modern administrative coordination.
The new middle managers did more than devise ways to coordinate the high-volume flow from suppliers of raw materials to consumers. They invented and perfected ways to expand markets and to speed up the processes of production and distribution. Those at American Tobacco, Armour, and other mass producers of low-priced packaged products perfected techniques of product differentiation through advertising and brand names that had been initially developed by mass marketers, adver- tising agencies, and patent medicine makers. The middle managers at Singer were the first to systematize personal selling by means of door-to- door canvassing; those at McCormick among the first to have franchised dealers using comparable methods. Both companies innovated in install- ment buying and other techniques of consumer credit. They devised ways to assure collection and set policies on repossession when the customer failed to keep up his payments. And they were the first to work out ways of providing after-sales service and repair. Whereas they pioneered in the marketing of light machinery, the middle managers at General Electric, Westinghouse, and the heavy-machinery makers did the same thing for heavier producer’s goods.
In addition, the middle managers created new and faster channels of distribution. They set up strategically placed warehouses, perfected the use of mixed and dropped shipments, and devised new types of accounting and statistical controls. They developed techniques to purchase, store, and move huge stocks of raw and semifinished materials. In order to maintain a more certain flow of goods, they often operated fleets of railroad cars and transportation equipment.
The middle managers played a comparable role in production. Those in the tobacco and packing companies improved continuous-process ma- chinery and methods, while the heads of manufacturing departments of the sewing machine, typewriter, and other light machinery companies were leaders in perfecting methods in mass production through the fabrication and assembling of interchangeable parts. The latter borrowed from and contributed to the achievements of Frederick W. Taylor and the other practitioners of scientific or systematic management. Not only did these middle managers help to perfect new complex machines and the modern form of factory organization, they also adopted, much more quickly than did American Tobacco, Armour, and other producers of packaged consumer goods, the new techniques of factory cost accounting.
By reshaping the processes of production and distribution the middle managers helped to assure the dominance of their enterprises. They in- creased output and reduced costs by using more intensively the resources under their command. The lower unit cost in manufacturing and distribu- tion and the trained and experienced sales force created a continuing, sturdy barrier to the entry of smaller firms.
The desire to maintain and expand the use of their facilities brought growth. One reason American Tobacco moved into smoking, plug, and other tobacco was to assure a steady and growing use of its purchasing (leaf) and marketing organization. This was also why International Har- vester and other agricultural implement firms developed their full lines. At Armour the decision to exploit by-products of the packing process led to the creation of new marketing organizations, and the decision to use its distribution facilities more fully led to the building of new buying net- works. At Armour, integrated suborganizations began to evolve to coordi- nate flows to the different product markets.
Expansion overseas, for much the same reason, was by World War I having the same results. Increased demand created by the expansion of a sales force overseas led to the building of factories abroad. Often this was the result of transportation costs or local tariffs and other restrictions on imported goods. As often, however, the construction of new factories resulted from the need to assure effective administrative coordination of flows of goods to the customer. For example, of the thirty-seven American companies listed by Mira Wilkins as having two or more factories in Europe by World War I, twenty-three had built plants in Britain, where there was no tariff and where the transportation costs from American plants were the lowest.74 After factories had been built the imperatives of coordination and costs often led to obtaining supplies locally. Thus by 1914 integrated suborganizations were appearing to serve large regional overseas markets.
Middle managers also determined methods of competition. Oligopolistic competition among the new, modern, multiunit integrated enterprises had little resemblance to the more traditional competition between single-unit manufacturers who bought and sold through middlemen. To the latter the price paid for materials and received for their goods remained an important consideration. For the new industrial corporations pricing was only one of many ways of competing. When more than one large integrated enterprise dominated an industry, competition between them was carried on at every stage of the processes of production and distribution. Such competition was most obvious in marketing and distribution. There it occurred in advertising, in the training and supervision of salesmen, in maintaining prompt deliveries, in credit terms, and in providing satisfactory after-sales service. It also occurred in production. There improved machinery and plants increased productivity and so lowered costs, improvements in products attracted and kept customers, and improved statistical and accounting controls further increased productivity. In addition, competition took place in purchasing. The ability to buy in quantity to close specifications, to be aware of changing sources of supplies, and to schedule flows to avoid unnecessary stockpiling all affected the quality and the cost of the final product.
Competition between these enterprises was, therefore, ultimately be- tween their managers and organizations. The success of a firm depended primarily on the caliber of its managerial hierarchy. Such quality in turn reflected the ability of the top executives to select and evaluate their middle managers, to coordinate their work, and to plan and allocate resources for the enterprises as a whole.
It was precisely here that the administration of these early large inte- grated enterprises was weak. Coordination of the flow of materials through the enterprise was not tied to a carefully calculated estimate of demand. It was achieved largely by personal cooperation between the heads of functional departments and their staffs. Evaluation and review of departmental performance was rarely systematic. The growth of the enterprise was only occasionally planned with an eye to long-term changes in supply, demand, and technological innovation. Growth came rather as a response to short-term needs and opportunities as perceived by different sets of middle managers.
One reason for this weakness was that owners still managed. The number of top managers remained few, and those few rarely had the time or inclination for objective evaluation and long-range planning. High- volume cash flow had permitted these enterprises to be self-financed. The McCormicks and the Deerings, the Singers and the Clarks, the Procters and the Gambles, the Crowthers and the Stuarts, the Armours and the Swifts, the Pabsts and the Busches, the Dorrances and the Bordens, the Heinzes, Pillsburys, Eastmans, Candlers, Wrigleys, and the entrepreneurs who built Remington Typewriter and National Cash Register, Burroughs Adding Machine and Otis Elevator, all owned the companies they managed. Others such as Duke of American Tobacco and Barber of Diamond Match continued to have a controlling share of the stock in their companies after they had expanded by merger or acquisition.
These entrepreneurs and their families continued to look on their enter- prises much as the owner-managers of traditional enterprises did. Where family members were no longer the chief executive or in other top man- agement positions, close associates who had been personally selected by the family usually occupied these posts. The owner-managers prided themselves on their knowledge of a business they had done so much to build. They continued to be absorbed in the details of day-to-day opera- tion. They personally reviewed the departmental reports and the statistical data. They had little or no staff to collect information and to provide expert advice. They promoted, hired, and fired their subordinates as often on personal whim as objective analysis.
Long-term planning was also highly personal. In building their business empires Duke, Swift, Armour, Clark, and the McCormicks were impressive, even brilliant business strategists. But their moves were personal responses to new needs and opportunities. They did not plan systematically for the continuing growth of the enterprise. They rarely adopted formal capital appropriation procedures, rarely asked for budgets. In the more routine expansion of existing operations and facilities they responded to ad hoc requests of middle managers. These they normally approved. As owners— and very wealthy ones at that—they saw little reason to veto such plans for expansion. On the contrary, as owners they had much to gain. What could be a better investment than to plow back profits in order to make existing resources still more lucrative? For these reasons, the enterprises that pioneered in the ways of middle management did very little to develop methods of top management. That contribution was made by the managerial enterprises that grew out of the early industrywide mergers.
Source: Chandler Alfred D. Jr. (1977), The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.